Death Of Neoliberalism, From A New Zealand Angle
A Word From Afar: The Death Of Neoliberalism, From A New Zealand Angle
A Word From Afar is a regular column that analyses political/strategic/international interest.
Neoliberalism, the late 20th century offspring of monetarist macroeconomic theory, was officially pronounced dead by the US Congress on October 4, 2008 after a lengthy illness. Its parlous condition was diagnosed in the late 1990s and deteriorated markedly thereafter, less than twenty years after it appeared as a global ideological phenomenon.
Although considered to be dead by the political Left at various points during the last two decades, it clung to life so long as leaders in the US and other major financial centres maintained a quasi-religious belief in its longevity. For the last two years it has been on artificial life support. In the end the prognosis was terminal and death was ugly, in no small part because like AIDS, it infected the innocent and ignorant as well as the willingly complicit. Post-mortems confirm it suffered from an inherent defect.
Neoliberalism championed the unfettered primacy of financial markets as the guiding hand of global capitalism. The main policy prescription embodied in the so-called “Washington Consensus” led by the World Bank, World Trade Organization and International Monetary Fund was that the lowering of trade and investment barriers in conjunction with the deregulation of financial and subsidiary markets (such as insurance provision) would pave the way for an unprecedented era of global market growth and integration.
The reasoning was that finance capital would be the best arbiter of productive investment, and that removing regulations on financial markets and restrictions on investment and trade would facilitate more efficient distribution of capital across borders. That was because investors required credit to fulfill their productive aspirations and the financial sector would be judicious in their lending practices.
The more permeable local capital markets became, the more easily they could be attuned to the requirements of a global system of production and exchange. Finance traders centred on Wall Street were therefore seen as the steadying force guiding the invisible hand of global economics, with their regional and national surrogates adjusting the big picture plays to the realities of local conditions. Granting of credit lines was their seal of approval on investment decisions.
What occurred in reality was something different. Taking advantage of the moment of opportunity provided by the shift towards market solutions to issues of macroeconomic growth and development, currency speculators and money managers did in fact leap to the fore of international economics. However, rather than focused investing in areas creating productive wealth, many of the financial elites centred in New York, London and Hong Kong sought to maximize profits by engaging in debt-for-equity swaps, hostile takeovers with asset stripping and quick turn-around sales, sub-prime lending and currency roulette (where capital is placed in the international money market and rotated between national currencies depending on the relative value difference of foreign exchange rates—also known as the “merry-go-round”). Hedge funds and finance companies sprung up in deregulated markets as alternatives to stockbrokerages and banks, each offering massive returns at what seemed, initially, favourable terms with regards to risk. In many cases investment portfolios consisted of little more than unsecured Chaebol-type crony lending whereby investment capital circulated amongst front agencies owned by the same people. Governments were, by legal design, powerless to intervene in the affairs of such organizations and the entire combine took on the logic of a buyer beware flea market.
Rather than conduits for more efficient productive investment, a large part of the world financial elite effectively became ticks on the global productive dog. They grew large by feeding off of the net monetary surplus of the productive classes in different countries. Credit rather than cash became the (illusory) currency of trade. Although a large amount of productive investment did occur and the trickle-down effects intended by the Washington Consensus architects did in fact eventuate in many places, the main beneficiaries of neoliberalism were money managers themselves. Nowhere was this more apparent than in the US, where executive salaries, stock options and bonuses for even the most unimaginative money managers ran into tens of millions of dollars. But even small countries like New Zealand saw the emergence of money managers as new leaders of the national economy.
Under conditions of financial sector deregulation and privatization of national productive assets, allowing finance capital to dictate global production was bound to be fatal. Like heroin, the more discounted unsecured credit was offered to at-risk borrowers, be they governments, firms or individuals, the more borrowers craved further credit infusions. Credit debt replaced fiscal prudence in environments in which demand-side commodity consumption was encouraged as the solution to macroeconomic slowdowns (recall George W Bush’s exhortation to the US public to “go shopping” after 9/11). “Trust” became the lender’s guarantee, but unlike Ronald Reagan’s famous maxim, this was trust accepted without verification, or for that matter, cash in reserve. The result was inevitable: at some point credit debt outstripped cash reserves, trust was betrayed and defaults set in at all levels.
In advanced economies this deleterious effect began with individuals, moved upwards through small and middle-sized businesses, and ended with the collapse of large financial conglomerates. In less advanced economies the negative symptoms began with governments and filtered downwards from there (as in the case of the 2001-02 Argentine economic crisis). In any event, the repercussive, ripple outcomes of the inevitable liquidity crisis were devastating for all involved, although the problem only attracted governmental notice in the US (and elsewhere) once it infected the corporate elites who benefited the most from it.
It is not as if the problem of the neoliberal disease was unknown. In the US warning signs of decay (in its specific US manifestation) were evident from the onset. Referring to his own country, American strategic theorist and diplomat George F. Kennan (not known for his anti-capitalist views) wrote in 1985:
A country that has a budgetary deficit and an adverse trade balance both so fantastically high that it is rapidly changing from a major creditor to a major debtor on the world's ex- changes, a country whose own enormous internal indebtedness has been permitted to double in less than six years, a country that has permitted its military expenditures to grow so badly out of relationship to the other needs of it’s economy and so extensively out of reach of political control that the annual spending of hundreds of billions of dollars on "defense" has developed into a national addiction—a country that, in short, has allowed its financial and material affairs to drift into such disorder, is so obviously living beyond its means, and confesses itself unable to live otherwise—is simply not in a position to make the most effective use of its own resources on the inter- national scene, because they are so largely out of its control
(Foreign Affairs, V.63, N.4 (Winter 1985/86): 215-216).
Twenty odd years later, his words ring sadly ironic and true.
One interesting aspect of the neoliberal disease is that where credit markets are shallow, such as New Zealand, the lack of depth provided a measure of insulation from the worst of the September 17, 2008 US capital market meltdown. Lack of interest in small capital markets on the part of major financial players meant that such economies had a buffer when the collapse came simply because there was not so much invested and risked in them (even if many local finance agencies went bankrupt months before the Wall Street meltdown in what was an early warning sign of what was to come). Conversely, the more depth to any given credit market, the more it held on to the appearance of health and the more directly it eventually felt the impact of the Wall Street downturn, with all of its attendant ripple effects. In other words, being unattractive as a capital market ensured a degree of immunity from the neoliberal disease.
A variant to this “immunity” came in the form of high prices for commodity exports. Somewhat perversely, in an era of increased price elasticity for their products, countries dependant on primary good exports such as minerals, oil or grain reaped the rewards of high prices set by commodity markets in the US and other advanced economies. This gave the commodity exporters infusions of cash that lowered the amount of debt they assumed when pursuing further economic expansion or development goals. Conversely, manufacturing based economies found themselves increasingly dependent on credit as the cost of primary good inputs escalated.
The US government bailout package approved by Congress in early October is a pork-laden short-term solution that is more a token of symbolic reassurance than a viable financial reform package. The cognitively challenged Republican candidates for president and vice president simultaneously support the bailout while railing against “Wall Street corruption.”
They are either hypocrites or apparently oblivious to the fact that the Republican Party is the political arm of the financial elite wrapped in neoconservative garb. The relationship between the spineless Democratic Party and the US financial elite may not be as instrumental, but it nevertheless is also one of transparent subordination and hypocrisy when it comes to Wall Street. Hence, corporate executive salaries and bonuses receive as much attention in the bailout plan as do insured deposits for small time investors. Mortgage owners facing foreclosure get token relief. Those who made super profits on lending or insuring risky sub-prime loans are rewarded rather than punished. More regulation of financial markets is promised but the details are yet to be specified.
This may seem unwise and unfair, but there is a reason as to why financial elite interests must be accommodated even if they are, in the Spanish phrase, the economic “grand marshals of defeat” (mariscales de la derrota). That reason reduces to the structural dependence of state and society on capital.
In capitalist societies the welfare of both the state and society ultimately depends on the aggregated investment decisions and profit generation of private capitalists (firms as well as individuals). The exchange between the actors is simple: capitalists consent to systems of taxation and redistribution in order to operate in environments of social and political stability; the state and society consent to the economic dominance of the propertied elite. Whether their decisions are right or wrong, beneficial or detrimental to society as a whole, so long as the system is founded on private capital as the ultimate determinate of material wellbeing, it must first heed the needs of the dominant elements of the capitalist classes. If corrections in course must be made to save the system as a whole, the initiative must come from leading economic sectors. However, for them to move they must be given political as well as economic incentives that confirm rather than undermine their structural position. This was true during the Great Depression and it is true today. When the leading edge of the economy is finance capital, their interests must be satisfied first.
Thus it is with the US government bailout plan. It gives the grand marshals of the global financial crisis an opportunity to regroup and recoup their losses as the first priority. It is hoped that the financial sector will then stabilize around a new cluster of oligopolies that in turn will grease the wheels of other productive sectors with renewed investment incentives, resulting in renewed trickle down effects on national economies and the worldwide system of trade. That remains to be seen.
Short of a political decision across international boundaries to curb the influence of financiers in the global network of production and exchange, there is no alternative to the system as given. Even anti-capitalist initiatives like those of Venezuelan president Hugo Chavez that seek to promote “socialist” (or at least more redistributive) regional trade markets such as the Boliviarian Alternative for the Americas (ALBA, which includes provisions for a development bank) suffer from relative under capitalization and over-reliance on commodity export prices, which leaves them vulnerable to punitive manipulation by major market players. Short of abandoning capitalism, the dye is cast when it comes to how to confront the crisis of the global financial system. In effect, although neoliberalism has died, its corpse will be disinterred and paraded at regular intervals in ideological tribute to the primacy of finance capital.
Its intellectual father, Milton Friedman, precedes neoliberalism in death. Numerous acolytes and supporters, including Treasury and Central Bank officials around the world, survive it. In New Zealand, which has some of its most ardent policy adherents, Donald Brash, Roger Douglas, Ruth Richardson, Rodney Hide and John Key remain committed to its posthumous deification.
Funeral services for neoliberalism will be held worldwide in private, by corporate and government invitation. Although widespread amongst small investors and mortgage holders, expressions of financial grief remain personal and unattended. In lieu of flowers, donations to a New Zealand neoliberal legacy fund will be accepted at local banks, payable by cheque or cash to the National and Act parties.
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